. Pandemic costs country N11.6trn output loss
. Things’ll get worse before they get better – Analysts
Following the second wave of the COVID-19 pandemic spiking downward trends in economic activities across the world, financial analysts have predicted that the year 2021 may look bleaker, as disruption in an output loss amounted to N11.6trillion last year.
First Securities Discount House Limited (“FSDH”) in its 2021 economic perspective and outlook warned that inspite of the optimism about a global economic recovery in 2021, there are still potential risk factors.
It, however, said it is banking on “a more predictable and somewhat less exciting (compared to 2020) 2021.”
FSDH analysts explained that the risk of a second wave of the virus is real, adding, “While public health systems are already stretched globally, the advent of winter could see a material increase in new cases – especially in boreal regions. The global easing of travel and tourism restrictions also raises the risk of cross border infections, as seen in the first wave, while the return of social interaction could accelerate local transmission.”
They, however, regretted that the pandemic has resulted in tangible business losses.
“We estimate the loss in real output from COVID-19 and other disruptions in 2020 at N5.8 trillion, in nominal terms, this loss is estimated at N11.6 trillion. In addition to the direct output loss, there have also been significant job losses, income losses, erosion of monetary value, among others. COVID-19 and other disruptions have reversed the gains achieved since 2017,” they said.
According to the FSDH analysts, inflation is higher than pre-COVID-19 levels, while closure of land borders, VAT increase and structural challenges have driven up prices of goods and services as inflation will likely trend upwards going into 2021.
“We may however begin to see improvement in real interest rates from 2021 as food prices will moderate,” they said.
On the expectations in the Money and Capital Markets, the analysts said the market would experience increased activities as the deficit of N5.2trillion in the Federal Government’s 2021 Budget will be financed mainly by borrowing.
“Despite this, the government’s efforts to achieve debt sustainability could result in suppressed yields in early parts of the year. Given the excess liquidity in the market, the government holds a strong bargaining power. Therefore, primary auctions would continue to offer low yields,” FSDH said.
They noted that the introduction of the CBN special bill could stabilise the fixed income market, while corporate bonds and commercial papers will gain further traction as investors scramble for alternative investment vehicles and businesses take advantage of low interest rate environment to raise capital.
On the money market level, they said with over N5.1trillion expected to mature in 2021, liquidity in the system will record further increase.
The analysts said, “Consequently, yields on CBN bills alongside other rates will remain low in the early part of the year. However, we believe regulators will make efforts to increase rates in order to attract foreign capital into the economy. This will materialise in the second quarter of 2021.
“Other downside risks to economic recovery include the strength of the health systems, the path of COVID-19 and availability of financing. According to the IMF, more urgent than ever, many African economies will need to implement transformative domestic reforms to promote resilience, including revenue mobilization, digitalization, and fostering better transparency and governance.
“Recovery in 2021 may however be K-shaped – uneven and split between industries and income groups. Technology related sectors could record stellar growth, while structural impediments – especially in emerging markets – could constrain manufacturing recovery. The process of re-thinking supply chains could weigh on both domestic and international trade, and delayed recovery in middle-class incomes could cause growth in realty to lag.
“But the road to recovery could be quite arduous. Things could get worse before they get better. Many countries came into the pandemic with pre-existing weaknesses. Large fiscal and current account deficits (Brazil; South Africa), mono-sector economic structures (Columbia; Russia) and inconsistent macroeconomic policies (Turkey; Mexico) are weaknesses that can magnify vulnerabilities in the near term and weigh on recovery efforts by global policy makers, as such, global economic recovery from the pandemic-induced downturn, remains fragile and patchy.”